Oil Price – A Critical Drop
Oil Price is one of the main themes of the global economy in 2015. During the year, oil prices went from near $100 to below $40 a barrel. This drop had a major impact especially among oil exporters such as Saudi Arabia and Nigeria. In other markets such as USA, the drop in oil prices dragged along the major indices such as NASDAQ and S&P. 2016 has began on a rather mixed up situation. During the first quarter, we have seen oil prices reach the lowest levels in 13 years. West Texas Intermediary (WTI) reached $25 a barrel while ICE Brent reached $26 a barrel. This was further accelerated by OPEC which held a meeting in December and decided to continue with status quo. Another key issue as the declining demand and the reentry of Iran to the oil exporting countries.
Oil prices have now started to go up with WTI crossing the $40 a barrel mark with Brent nearing a $45 level. These levels are attributed to the fact that Russia (a major exporter of oil) and the OPEC countries have decided to meet in April to freeze the oil output. Earlier this week, the momentum that was building up was momentarily lost when Iran threatened to increase its oil production. I believe that Iran will not accept a situation to reduce its oil production. Their valid argument will be that they were not the cause of the current oil troubles.
If the meeting agreed on freezing the oil production, then I believe that a $70 oil could be with us in 2016. However, I believe that the conflict of interest among the oil producing countries will not produce a good situation. In addition, if Saudi Arabia agrees to reduce oil production, their original goal to ‘punish’ the shale producers will not be met. This is because many shale producers are thriving albeit with serious challenges. A good number of these companies have closed shop or reduced production.
Oil Price – Why Increase and Decrease
Oil prices are dependent on a number of factors such as demand and supply. Additional factors are the global economy and the dollar. In terms of the global economy, if the economy is weak, then chances are that the demand will not be high. This will pull the prices down. On the second factor, oil is quoted in dollar terms. As such, if the dollar strengthens, then the price of oil will be brought down. If on the other hand the dollar becomes weak, it will pull the price of oil down.
This week, the federal open market commission held their meeting where they decided to leave the interest rates unchanged. They also reduced the growth forecasts. As a result, the dollar weakened with the dollar index reaching the lowest level since March last year. The combination of this situation and the meeting pushed the oil prices higher.
As the oil prices increased, so did the price of key asset classes. Shares of oil companies such as Chevron and Exxonmobil reached their highest levels. In addition, the key indices such as the Dow, S&P, and NASDAQ turned positive. In fact, in the recent past, oil has been the key driver of the financial markets. They have had a near perfect correlation. This means that the key indices are turning positive when oil goes up and vice versa.
Therefore, the future oil prices will be determined by the upcoming meeting. If an agreement is reached, I believe that oil will end the year at more than $70. If on the other hand no agreement will be reached, then oil could go as low as $20 a barrel.
Oil Price – Useful Links
Photo by Dollarphotoclub